FX Update: Dollar Weakness Supports GBP and EUR Ahead of Holiday-Thinned Trading.

• USD – Remains under pressure after a softer-than-expected US jobs report weakened expectations for near-term Fed tightening. While the dollar has lost momentum, markets are not yet pricing a significantly more dovish Federal Reserve, limiting the scope for a sharper decline.

• EUR – Is in a position of modest strength against the dollar, supported primarily by USD weakness rather than euro-specific optimism. However, uncertainty around the ECB’s next move is preventing a more convincing rally.
  

• GBP – Is outperforming both the dollar and the euro for now, supported by hawkish comments from the Bank of England and broad USD weakness, though upcoming UK PMI data will be important in determining whether sterling can extend its gains.

USD:

The US dollar is heading for its largest weekly decline since April after a weaker-than-expected labour market report reduced expectations of another Federal Reserve rate hike in the near term. Non-farm payrolls increased by just 57k, while downward revisions of 74k to the previous two months reinforced signs of a cooling labour market. Although the unemployment rate edged down to 4.2%, this was largely due to a lower participation rate rather than stronger employment. Overall, the data was soft enough to weigh on the dollar but not weak enough to revive expectations of imminent Fed easing. With US markets closed today for the Independence Day holiday, trading activity is likely to remain subdued.

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EUR: 

The euro benefited from broad US dollar weakness following the disappointing payrolls report, although gains have faded into Friday’s session. The move higher appears to be driven more by USD softness than renewed confidence in the euro itself. Markets remain uncertain over whether the European Central Bank will deliver another rate hike, with expectations for further tightening this year having declined noticeably. As a result, the euro may continue to find support while the dollar remains under pressure, but a lack of strong domestic catalysts is likely to limit further upside.

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GBP: 

Sterling has continued to perform well, rising against both the dollar and the euro after Bank of England policymaker Catherine Mann reiterated that she would be prepared to support further rate hikes if inflation expectations or other price pressures fail to improve later this year. The comments reinforced the Bank’s relatively hawkish stance and helped extend the pound’s recent gains. Attention now turns to the release of the latest UK services and composite PMI data, which will provide further insight into the strength of the UK economy and whether sterling can maintain its positive momentum.

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